No country can function without debt. But with countries such as Greece and Italy continuing to give economists and politicians sleepless nights, swissinfo.ch explains the causes and potential consequences of being seriously in the red.
Tax income alone is not enough to build roads, hospitals and schools, so nations issue bonds to borrow money from the financial markets. However, some economists fear the world is growing dependent on a growing mountain of debt – and it could end badly.
The European Union considers the safe limit of state debt to be no more than 60% of a country’s annual economic output. But many countries have gone way over that limit. In fact non-EU Switzerland is one of few European countries under it, according to estimates by the International Monetary Fund (IMF).
As shown below, the most-indebted countries are largely “rich” economies. As in real life, the more money you have, the more you can borrow. Also, rich countries are mostly democracies, where political parties compete to offer voters more services in return for less tax. This has led them down the path of budget deficits year after year – rewarding the voters of today and sending the bill to the voters of tomorrow.
The financial crisis has demonstrated the problems of too much debt. Greece and Italy are still suffering from letting debt spiral out of control. As economic activity fell and jobs were lost, they were among a clutch of countries that found it difficult to service their debt as tax income dried up. Ironically, the European Central Bank then had to print €1 trillion (CHF1.06 trillion) to buy bonds from these countries because no one else was willing to take them.
Other countries have increased debt levels for a variety of reasons. China has pumped vast amounts of money into infrastructure projects and state-owned enterprises to fuel rapid economic development. Japan’s government has created a mountain of debt in an attempt to stimulate its flagging economy.
Earlier this month, Goldman Sachs bank joined a long line of observers concerned about rising debt levels. In particular, Goldman Sachs pointed out that ageing populations will produce less tax income while placing a greater strain on pension and health systems. It worries this will make it increasingly hard to pay back debt.
Switzerland found a compelling reason to reduce debt after its economic scares in the 1990s. In 2003, it introduced a debt brake that forces the government to keep spending in check and build up a buffer to service payments during economic downturns.
Not everyone is convinced by the Swiss debt brake, which has been emulated by other countries. Left-leaning politicians believe the spending controls could damage public services.